I might be in the minority here, but this presidential election season seems more taxing than most. I really wish there was an interesting, or even realistic, tax proposal I could dissect for you all, but nope. All we are getting is “red meat” for the bases. 

The Harris proposal includes raising corporate taxes. This sounds wonderful: Let those greedy corporations pay all the taxes. The problem with this in practice is that corporations are purely legal entities. Where does the money come from? The revenue for corporations comes from you and me and all the other consumers out there. The corporations’ expenses include buildings and equipment, etc., but the largest expense in almost every corporation is payroll. Their money comes from consumers and goes primarily to workers. 

When taxes are raised on a corporation, their first impulse will be to pass on the expense to consumers. I know in our political fantasyland corporations can just raise prices whenever they want, but in the real world, prices are determined by supply and demand. Corporations can raise prices, but then they will sell less product, so that doesn’t automatically lead to higher revenue. Corporations cannot just raise prices to pay the tax and stay in business, so they must cut other expenses. What is their largest expense item? Payroll. 

If you do believe that all corporations are run by greedy individuals, you have plenty of evidence to support that belief. Whose salary do you think will get cut to pay those taxes? If you guessed the rank-and-file employees, then you would be mostly correct. A good business (and they are out there) might spread it evenly, but even then, the rank and file are getting hit. Corporate tax is a tax on workers. 

When the Trump administration cut corporate taxes, two things happened that may be counterintuitive to the non-economist. First, tax revenue from corporations actually increased. As we pointed out in our Quarterly Report from the third quarter of 2010, taxes work like prices: It is certainly possible to raise rates and collect less as well as to lower rates and collect more. Secondly, we had real wage growth and for the first time this century, most economic growth benefitted the middle class. Corporate tax cuts benefitted the people most economists said they would, and that was the rank-and-file employee. 

The more traditional argument against the corporate tax still holds true: The corporate tax is by definition a double tax. Follow the money: Corporations get revenue from consumers who pay for the products with money that has been taxed, and they almost always have to pay an additional tax on the sale of the product. Then, the revenue is used to pay employees, each of whom must pay taxes on that money. Any money left over is often distributed to shareholders as a dividend, which is also taxed. All of this money is already taxed at least once. The corporate tax is a double dip. 

On the other side, Trump has proposed not taxing Social Security or tips. On that note, should this pass, Iron Capital and AssuredPartners Investment Advisors will be amending our contracts, changing “investment management fee” to “suggested gratuity.” Yes, that is a joke, but so is arbitrarily excluding a certain form of income from the income tax. 

The proposals from both campaigns are so bad that it might be easier to think about what a good tax system would look like. The goal of an ideal tax system would be to fully fund the government while having the least amount of impact on the economy as a whole. This is actually what was attempted in the 1980s. The tax reform acts of 1982 and 1986 were exactly that – reform. Yes, the highest nominal rate went from 70 percent to 28 percent, but with that went a massive closure of tax shelters. This is exactly what all should want: An honest tax rate that all people actually pay, each paying their fair share. 

Politicians, on the other hand, love high rates. High rates create an incentive to find loopholes, and loopholes are paid for through political contributions. Economists refer to this as rent seeking. Restaurant owners will make significant political contributions to keep tip wages tax-free, and corporations will make significant contributions to avoid having to pay those sky-high corporate tax rates. 

The first tax that I am aware of was proposed by Joseph to the Pharoah. Joseph understood the Pharoah’s dream to mean there would be seven years of plenty followed by seven years of famine. Joseph suggested a 20 percent tax: 20 percent of the harvest was stored in grain houses so that when the famine hit, Egypt could care for its people. To our knowledge there were no loopholes or exemptions; everyone paid their fair share. Interestingly, approximately 20 percent of total economic output is what governments through time have been able to sustainably collect. It has not mattered what the stated rates are, or the overall structure of the tax systems.

I would love to be able to tell you that one of the presidential campaigns had a better overall tax policy, but that is not clear at all. Both campaigns seem eager to use the tax system to benefit specific groups over everyone else. That is certainly the incentive of any politician. We would have a much better economy and frankly a fairer world if they stopped playing these games, at least that is my perspective. 

Meanwhile, we will be researching non-corporate business structures and pure gratuity business models…got to cover all of our bases. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~This is Taxing

It is that time again: Presidential election season. While we do not talk politics at Iron Capital, we do talk economic policy and how it might impact our clients and their portfolios. 

This year’s comparison reminds me of a story. My wife, Frost, is a wonderful wife and what I would call a “modern” mother. She does the majority of our grocery shopping, and because she is a modern mother, our house does not contain any items with high-fructose corn syrup, or any non-whole grain breads, etc. Something like Pop-Tarts as standard fare is a nope. 

Then one year when the kids were younger, I took one for the team on our family beach trip and went to the grocery store while Frost took the kids straight to the pool. This was the summer my kids were introduced to Pop-Tarts. Needless to say, they wished that Dad would do the shopping from that moment on. 

Pop-Tarts are a delicious treat, and that is really all our kids needed to know. Of course, as parents we understand that Pop-Tarts are junk. They still don’t make it into our house on a regular basis, but since that year they have become a beach vacation tradition. If we let our kids eat Pop-Tarts all day every day, they would be a mess – overweight and irritable with very low energy from the perpetual sugar crash.

What does this have to do with economic policy? Everything. 2024 is the year of so-called populist policy suggestions. This means they are popular among people who know as much about economics as our Pop-Tart loving children knew about nutrition. 

Trigger warning: I am about to destroy one proposal from your favorite presidential candidate, and I don’t need to know who that is because both parties have abandoned economic reason this year. If you are sensitive to inconvenient facts, please skip. 

Perhaps the most common example is a favorite of Donald Trump’s: Tariffs on imported goods. Tariffs are a favorite because they sound so wonderful. “Tariffs on foreign steel will help protect domestic steel workers.” But, at what cost? Yes, they protect that one group, but what about the stevedores who unload ships full of foreign steel? What about others in the transportation business? What about the consumer who then has to pay more for anything made with steel? What about the auto worker who loses his job because the car he makes costs more, so consumers buy fewer of them? 

What about the safety when manufacturers find other, less sturdy substances to replace the steel that was in their products? Seem far-fetched? Well, do you know why there is high-fructose corn syrup in those Pop-Tarts? Because sugar is too expensive in the U.S. Why is sugar more expensive here? Because there are sugar farmers in Louisiana who can’t compete with sugar cane grown elsewhere, so the U.S. government for years has placed tariffs and quotas on sugar from foreign sources. 

With the high price of sugar, food companies found alternatives, and now my children are only rarely allowed to have Pop-Tarts and have to travel internationally to taste what a Coke is supposed to taste like. Tariffs hurt far more people than they help, but like many populist economic policies, the people who are helped are obvious while all those who end up getting hurt are far less so. Just because it is not obvious doesn’t mean the pain is any less. 

To make sure we make all of our readers mad, let’s discuss Kamala Harris’ price gouging grocery store owners. This is another old favorite of the populists: price controls. On the surface it sounds great – the government will just step in and tell grocers they can’t charge more than X for a gallon of milk. It sounded great in the early 1970s when Richard Nixon thought it a wonderful idea. “We will show those oil cartels, we will put a cap on the price of gasoline.” Then, I had to ride along to the gas station with my sister in case she ran out of gas while waiting in the long line so someone would be there to push the car the rest of the way. (We had some of our best sibling arguments on those trips, by the way.)

Price controls create shortages. To understand why, one needs to understand the law of supply and demand: The higher the price a supplier can sell her product for, the more of that product she is willing to make, and the lower the price, the less she is willing to supply. However, the consumer has the opposite incentive: The lower the price the more he will buy, and the higher the price the less he will demand. Price discovery is a process of finding the right price that matches the supply with the demand, creating a win-win situation in which the supplier and buyer get a price each of them is happy with. 

When that process is skewed by outside forces, disconnects happen. When the government artificially holds prices down, consumers will continue to demand high quantities but suppliers will not want to supply more, and eventually will simply not be able to supply more. This ultimately brought down the Soviet Union as the bread lines got to the point where there was no bread for anyone. We see the same pain today in Venezuela, and those of us who can remember the 1970s saw it firsthand. Price controls lead to shortages and rationing. 

I use just two examples, but there are more, and I’ll explain what they are and why they are awful in future weeks. In case you think I protest too much, this is being noticed elsewhere. The Wall Street Journal published an op-ed on August 20, “The Era of Good Economic Policy is Over.” Two days later their columnist Greg Ip published, “The Year Politicians Turned Their Back on Economics.” 

Meanwhile, don’t be fooled by the Pop-Tarts. Yes, they are delicious, but they are empty calories that will leave you longing for some actual food. I understand why politicians go to populist policies; it is a lot easier than trying to educate on the benefits of good policy. I may be naïve, but I have faith that people would understand if the politicians would simply talk to us as if we were adults. That may be just a dream, but the world would be much better off if it came true. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Pop-Tart Economics

As we approach our nation’s 248^th birthday, we are surrounded by “threats to our democracy.” At least this is what we are told. Of course, in true social media form there are plenty who simply reply, “We are a republic, not a democracy.” 

They are technically correct; we are a constitutional republic, not a direct democracy. Our founding fathers were as suspect of the mob as they were of the monarchy. No one would want to live under mob rule. However, for this discussion I am not so sure that response is very helpful. It certainly isn’t reassuring. Our republic is a democratic form of government and while there are probably some who cynically stoke this fear for their own political gain, I believe we should treat the charge seriously.

After almost a quarter of a millennium, what could actually threaten our country and way of life? I first thought of writing this around Memorial Day. The first Memorial Day (then called Decoration Day) was observed May 30, 1868, to remember those who died in the Civil War. At first it was applicable only to the Union soldiers, but the Department of Veterans Affairs credits Mary Ann Williams with originating the “idea of strewing graves of Civil war soldiers – Union and Confederate” with flowers. We have since added those who died in World War I and II, Korea, Vietnam, and most recently the gulf wars.

These brave men and women sacrificed themselves for our freedom – for our democracy, if you will. They helped keep this country together as one in the bloodiest war we have ever fought. They protected us from the Germans, then they protected us from the Germans again, and the Japanese. They protected us from the communists, and from terrorists. When one considers the massive threats our democracy has survived thus far, one wonders what great force is out there that could possibly destroy it today?

As I watched the first presidential debate, I could think of only one real threat. On stage stood two men who, if polls are to be believed, almost two thirds of the country wish weren’t running for president. I’m not sure the polls can be trusted, but it seems odd that for months leading up to the primaries we were told repeatedly that a large majority of the country wanted none of the above.

Then the Republicans had the Iowa caucus, and the media made a big deal about Donald Trump winning 51 percent of the vote. From that point on, the Republican primaries were all but over. Less noted was that 85 percent of Iowa Republicans didn’t vote. In other words, Trump won 51 percent of 15 percent; so, for all intents and purposes, 7.65 percent of Iowa Republicans chose the Republican nominee for President.

On the Democratic side it is even worse. Although polls consistently showed that 60 percent of Democrats did not think Joe Biden should run for re-election, the powers that be in the party stopped any serious challenger. They chased out of the party the only challenger with any chance, refusing to put him on ballots. After Biden’s performance in the first debate there is talk about simply replacing him. Not sure how that will be done, but one thing is sure, it won’t be democratically.

For the first time in my life, the Georgia primary voters (regardless of party) did not get a chance to vote for who they thought should represent their party in the presidential election. Georgia is not alone.

On the Fourth of July we celebrate our Declaration of Independence. It always reminds me of something my father would say any time he gave me the freedom to do something: “With freedom comes responsibility.” Voting is not just a privilege in our republic, it is a responsibility of citizenship. It is a responsibility not just once every four years when we elect a president, but every time there is a vote. It is a responsibility during the mid-term elections, the primaries, the school board, and the mayoral elections. If there is a vote in your community and you are a citizen of that community, then you have the responsibility to vote.

We don’t make political judgements at Iron Capital. I am not saying that I am against either candidate. It is certainly possible that had we all showed up and gotten to vote in the primaries that we would have ended up with the same two candidates, but we will never know. Regardless of what Biden chooses to do, the Democrats will have a candidate chosen not by the people, but by party leaders. The Republicans will have a candidate chosen by 7.65 percent of Iowa Republicans.

Our form of government will survive either one of these candidates, as we are not that fragile. However, the one thing it will not survive is the gross lack of participation. If I were in charge for a day, I would make a rule that one could not vote in the presidential election if he or she didn’t vote in the midterm and the primaries. That will never happen, because any politician who proposed such a thing would be accused of trying to suppress the vote, but my motivation would be the opposite. It would be to encourage full participation in every election.

I am proudly patriotic, and I love the Fourth of July. This is the greatest nation on earth, and we are all blessed to call it home. For those who are quick to point out our flaws, I would suggest you not take for granted how rare that freedom has been in all of human history. Liberty is our core principle; it is what we celebrate on the Fourth. With that freedom comes responsibility, and we don’t talk about that second part enough. We would be a better country, and an even stronger republic, if we all participated in our democratic process. At least that is my perspective.

Happy Fourth! God Bless America!

Warm regards,

Chuck Osborne, CFA
Managing Director

~Threats to Democracy

This is the season to watch the Dickens classic, “A Christmas Carol.” We all know the story of Ebenezer Scrooge, a businessman who has been consumed by greed. He is visited by three ghosts who collectively show him the error of his ways. 

Attacking businesses and their leaders as greedy is a common refrain, but how do we know this is the case? I would suggest that corporate greed could be measured by the extent an industry raises their prices relative to overall inflation. The higher the price increase above and beyond inflation, the greedier the industry. Does that seem fair? 

If so, then which industry is the greediest of them all? Would it be oil companies? No. While there are short periods of time where oil prices rise faster than inflation, there are more times when inflation goes up while oil prices stay steady. In fact, in 1980 a gallon of gas cost $1.19; adjusted for inflation, that would be $4.25 in 2022 dollars. Today the national average price is $3.01. So adjusted for inflation, gas costs less today than it did in 1980. 

How about the tech giants? The basic iPhone cost $499 in 2007, which would be $739 in today’s dollars, and it came with 4GB, which won’t store a lot of family pictures. The iPhone 15 costs $799 and comes with 128GB. That is a lot of added power for very little additional cost. 

The greediest industry in America, by a large margin, would be the industry of higher education. After adjusting for inflation, college tuition has increased 747.8 percent since 1963, according to the Education Data Initiative. Had college costs risen only by the rate inflation since 1963, the average cost today would be $2,122.75. 

I know what you are thinking: but colleges are nonprofit, and only people who make profits are greedy. So they say. Nonprofit is a tax status, not a business plan. In my experience, greed is measured by how obsessed one is over money. When I go to buy an iPhone, the subject of price will of course come up, but usually not until the end. We mainly talk about features: memory, phone quality, battery life, and coverage. Will I lose signal? How much data can I download? Then we discuss the price. Once decided upon, that is it. 

College admission starts with a full financial disclosure. It is all about cost, who will give the most aid, etc. Once in college, they start right away with the pressure to give. Once you are out, saddled with life-altering debt, the only thing one will hear from their school is, “Please give more.” The more they charge, and the more people give, the less time they seem to spend actually educating. 

Over the last few weeks, the most elite colleges in our country have been exposed as frauds. As Fareed Zakaria of CNN recently said, our universities “have gone from being centers of excellence to institutions pushing political agendas.” This CNN anchor went on to say, “New subjects crop up that are really political agendas, not academic fields.” 

Has there ever been an institution that has become this greedy and corrupt? I can think of only one: the Roman Catholic Church of the Middle Ages. Not today’s church, but the one of indulgences and inquisitions. The parallels are striking. 

Indulgences: First, a refresher – indulgences were payments to corrupt church officials who would then claim that the donors were forgiven of their sins…and that money ended up mostly in the pockets of those church officials. Today, we have the example of author and academic Ibram X. Kendi, who was lured to Boston University, where a reported $43 million funded his Center for Antiracist Research. The money came from corporations wishing to be forgiven for their lack of diversity. Three years later with little to show for the money, the majority of the staff was laid off. According to Saida Grundy, an associate professor of sociology at BU, this center showed “the pattern of amassing grants without any commitment to producing the research obligated” by them. Sounds a little like an indulgence to me, but this is not just in the academic wings of universities these days. 

On the other end of the spectrum, Texas A&M is now paying Jimbo Fisher approximately $76 million not to coach football. No, the athletic departments cannot be left out if this. This money comes from alumni who are told that they must donate if they even want the right to then pay for season tickets. It may be completely shameful that the presidents of three of the most elite universities in our country don’t know that genocide is a bad thing, but it is just as dense for Stanford and SMU to believe that they belong in the Atlantic Coast Conference. Note to our readers – if you are ever asked, genocide should always be condemned and Stanford is in California, which borders the Pacific Ocean, not the Atlantic. Indulgence indeed. 

One would have to have their head buried in the sand to ignore the inquisitions that have plagued our universities over the last several years. Cancel culture is real, and just like the days of the Spanish court, if one dares speak heresy, then he must be punished. Our universities have stopped teaching history and now they are repeating it. 

In 1517 a brave priest, Martin Luther, nailed 95 theses on the door of Castle Church is Wittenberg, Germany. His document revealed to the world the corruption that had grown within; what followed was the Protestant Reformation. Institutions can be reformed and redeemed. While it was not their intent, the three university presidents may have started another reformation. One can hope.

Scrooge awoke from the visit of the third ghost to learn that it was Christmas day. He hadn’t missed it. He had been transformed by the revelation of ghosts and it was said that he kept Christmas well. The same can happen to our universities, and we can hope that process has begun. I personally believe a positive next step would be for them to lose their tax-advantaged status; maybe paying taxes would bring a little reality to the ivory tower. At least that is my perspective. 

Chuck Osborne, CFA

Managing Director 

~Greedier than Scrooge

How do we know we are doing the right thing? Several years ago, I interviewed an industry veteran for a potential role at Iron Capital. I informed him that we had a zero tolerance for ethical violations, and he assured me this was music to his ears. Integrity was the most important thing in the world to him. In fact, he actually referred to himself as Mr. Integrity.

Mr. Integrity was working at Fidelity at the time, and while we were still considering him for a position, we needed his help. I don’t recall the details, but to get what we needed for a particular client, we had to assure Fidelity that we would bring a certain amount of business to their platform. This is not what Iron Capital does; we are not salespeople, so we were not willing to comply with Fidelity’s demands. We asked Mr. Integrity if there was another way, and he suggested that we simply lie: Tell Fidelity that we would do what they wanted, then once we got what we needed, just forget about it. He assured me that Fidelity didn’t even have a way of verifying after the fact.

Everyone thinks of themselves as ethical, but when push comes to shove, most will act out of pure self-interest. Dan Ariely is a professor at Duke University and a pioneer in behavioral economics. In his book, “The (Honest) Truth About Dishonesty,” he presents several studies which prove that most people will cheat if given the opportunity, and that conflicts of interest are stronger than most think.

Our industry is full of conflicts of interest, and regulation has centered around dealing with conflicts through disclosure. Ariely showed that when conflicts were disclosed, the individuals who disclosed the conflicts actually acted worse. His theory is that disclosing the conflict eases their guilt.

There are obvious conflicts in our business, but some are less so. For example, exchange traded funds (ETFs) versus mutual funds. ETFs have grown in popularity, and the reason often stated is that they are less expensive than mutual funds. That is because mutual fund fees include both the cost of managing the fund and the cost of servicing an account: A mutual fund has shareholders who buy into the fund at the net asset value, and the fund creates new shares every time a new investor joins. The fund has to manage an account for each shareholder.

ETFs, on the other hand, are traded on an exchange like stocks. The only disclosed fee is for the investment management as there is no account at the fund level; the account would be at the brokerage firm level. Salespeople tell you that ETFs are less expensive, but that might not be the case. I had a boss who loved to say that costs are like water balloons – squeezing one end simply makes the other end bigger. The ETF does not charge for account servicing; that expense is instead paid for by the cost of trading, which is the dealer spread. The ETF is not necessarily cheaper when all costs are considered, but the administrative costs are transferred away from the fund family and to the broker-dealer.

ETFs are more popular on Wall Street because Wall Street makes more money on ETFs. The idea that they are always cheaper is at best a half-truth, but it is a half-truth that also benefits the business model, so they are widely accepted and pushed by those who benefit. This is how conflicts work.

In our institutional business, there is a trend for consultants to take on more responsibility in managing retirement plans. The wonky term is that they become a 3(38) investment manager, which is a term that comes from ERISA regulation. In plain English, it means the adviser takes discretion to select the fund lineup for a retirement plan. Most argue that the adviser should then be paid more because she has more control and theoretically more liability. The reaction from most advisers is that if they have complete control, then the lineup should reflect all of their favorite options. Historically plans would be customized to fit the needs of a particular plan sponsor, but now the adviser makes the choices, and all of their plans look the same. The rationale is that they should put best-in-class options in every plan, but in reality there is no one best option. The truth is that making every plan look the same drastically reduces the amount of work for the adviser.

Higher fees for less work – that is a pretty big conflict. This doesn’t mean that ETFs are not appropriate in some circumstances, or that picking only the favorites may not work out. It does mean that these types of decisions, and many others, are often more conflicted than we all wish to admit. Being ethical is hard, and it takes a considerable amount of self-awareness. The world would be a better place if we all made that effort. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Ethics